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A $1.8 Trillion Investor Says U.S. Stock Rally Has Years to Run

(Bloomberg) -- The record bull market in U.S. equities may still have several years to run, according to one of the world’s biggest investors.

Capital Group Cos., which oversaw $1.8 trillion at the end of September, acknowledges that we’re in the late stage of the economic cycle, a period that generally lasts one to three years -- and this time shouldn’t be any different, it says. Earnings at U.S. companies will grow about 10 percent in 2019 and be slower but still “nicely positive” in 2020, said Andy Budden, investment director for Asia-Pacific at the money manager. That’s because the outlook won’t be too impacted by quickening inflation, he said.

In fact, the allocation to U.S. shares in Capital Group’s flagship global equity fund is the highest in decades, according to Budden. While “opportunities don’t come easy anymore” in the late-stage bull market, there are still chances to buy if investors are “selective about what they own,” he says. He favors a mixture of stocks with the potential for long-term growth, such as the big-name technology and internet companies, and more defensive shares that will perform better in market downturns.

“Given that this expansion has been pretty measured, I think we’re expecting that the late stage of the cycle will probably also be quite measured as well,” Budden said in an interview in Singapore. “And it doesn’t have to end in a recession.”

U.S. equities have bounced back since Christmas Eve, after a brutal sell-off last quarter that sent the S&P 500 Index down almost 20 percent from peak to trough. Budden says the rout was neither surprising nor a reason to change his investment outlook. If anything, it was a chance to buy, he says.

Capital Group is the Los Angeles-based overseer of the American Funds family. One of the markets it’s watching closely this year is China. Budden expects the Chinese government to introduce fiscal-stimulus policies in response to slowing growth, just as it did in 2015 and 2016, but the scale will be smaller this time because authorities no longer expect such steps to be as effective.

China will cut taxes “on a larger scale” to help support its slowing economy, according to a statement attributed to senior economic policy officials on Tuesday.

Brexit Confusion

On Brexit, Capital Group says it isn’t sure what the ultimate outcome will be as the U.K. prepares for a key vote Tuesday that’s expected to see Prime Minister Theresa May’s deal rejected in parliament. But most scenarios imply pain for the British economy for some time to come, according to Budden. That said, the nation has some good fundamentals, with everything from a dynamic economy and strong education system to “great global companies” that aren’t that reliant on the U.K. for revenue, he said.

“We really don’t know what’s going to happen,” Budden said.

Budden pointed to Japan as a market that has seen “dramatic progress” since Prime Minister Shinzo Abe returned to power in 2012. He says the changes in rules for companies and investors, including the revisions to the corporate-governance and stewardship codes last year, show that Abe’s government continues to have an impact. Capital Group’s Japan equity specialists are bullish about the nation’s stocks, he says, after the benchmark Topix index tumbled 18 percent last year for its worst annual performance since 2011.

Ultimately, Budden says he spends much of his time thinking about U.S. shares. He expects the Federal Reserve to raise interest rates once more and then hold rates at that level. But it’s incomplete to talk just about borrowing costs, he says, because investors must also factor in quantitative tightening. Still, with the prospects for continued earnings growth, he says U.S. shares don’t look that expensive at less than 16 times expected profits.

“We think that U.S. equity markets in particular should be able to support some reasonably positive returns over the next couple of years,” he said.